The stakes on tax policy are high as the election nears. Hereās how to prepare
Investors have a close eye on the Nov. 5 presidential election, but Congressional contests deserve attention ā as they could shape tax policy and the next steps investors take to prepare. āWhatever happens with the election next week, itās still going to take time for some significant tax law to come through,ā said Stephen Bigge, CPA and partner with Keebler & Associates in Green Bay, Wisconsin. Both candidates have shared ideas on their tax policy stances . Former President Donald Trump called for a reduction in corporate tax rates to as low as 15% from 21% and for a universal baseline tariff as high as 20% on imports (up to 60% on imports from China). Vice President Kamala Harris, meanwhile, has sought an increase in the corporate tax rate to 28% as well as a raise on the top rate for long-term capital gains to 28% for those making more than $1 million. Those proposals are eye-opening, but they would likely require a sweep in Washington of either party to result in fast-moving legislation. āWhat it comes down to is absent of any significant introduction of a bill next year ā early in the year ā the biggest issue is the sunset of the Tax Cuts and Jobs Act,ā Bigge said. The Tax Cuts and Jobs Act went into effect in 2018 and overhauled the federal tax code. It roughly doubled the standard deduction, adjusted the individual income tax brackets and lowered most of the rates. The legislation also applied a $10,000 cap on the state and local tax deduction, and it roughly doubled the estate tax exemption (it now sits at $13.61 million for an individual). Many of these breaks are set to expire at the end of 2025, so investors can at least start thinking about the next step ā and do so while they get their year-end planning set for 2024. āWeāre not coming up with elaborate techniques or esoteric plans; weāre just doing good old-fashioned tax planning 101,ā Bigge said. Mind your brackets, gains and losses The fall season is prime time for tax loss harvesting, meaning that investors prune some of the worst underperformers in their taxable accounts to realize capital losses and offset capital gains. If the losses exceed capital gains, investors can apply up to $3,000 of them to offset ordinary income and then carry forward the remaining losses. Take care not to violate the wash sale rule: The IRS can disallow losses if you sell a security at a loss and then buy it back within 30 days before or after the sale. Whether you still have some losses lingering from previous years or were able to part with a few losing positions this year, consider banking them ā you might need them soon, said Tim Steffen, CPA and director of advanced planning at Baird in Milwaukee. Thatās because mutual funds distribute their annual capital gains in the final months of the year, which can result in a surprise tax if you keep them in your brokerage account. āThe market has had another really good year, but we donāt know what the capital gains distributions will be this year ā and they always tend to be more than we think,ā said Steffen. In certain cases, it may also make sense to harvest capital gains, Bigge said. In 2024, individuals with taxable income thatās no greater than $47,025 (up to $94,050 if youāre married and filing jointly) are eligible for the 0% tax rate on long-term capital gains. Gain harvesting, just like loss harvesting, is for your taxable account. It involves tactically selling a few winners with minimal tax impact. You can also use this move to sell a few shares and buy them back to reset your cost basis and help save on taxes in the future. Work closely with your accountant to make sure your harvested gains donāt lift you into a higher tax bracket. āGet the gain at 0% and understand where you are in the tax bracket,ā Steffen said. Gain harvesting isnāt subject to the wash-sale rule ā but loss harvesting is. Bunch your deductions Strategic charitable giving is especially important in a year like 2024, where the market is marching higher. Many taxpayers who used to itemize deductions on their tax returns stopped doing so after the Tax Cuts and Jobs Act, and thatās given rise to ābunchingā deductions. This involves making several yearsā worth of charitable gifts to maximize your itemized deduction. Simplify your charitable giving ā and ramp up your tax savings ā by donating appreciated shares to a donor-advised fund. You get an immediate tax deduction in the year you make your donation, and you can spread out the grants to your favorite charities over time. These gifts are also a way to thin out heavy concentrations in your portfolio and collect a tax benefit for doing so. And they can ease the pain of taxes in high income years. āIf youāre exercising stock options or youāre retiring and you have this big income hit in one year, look into donor advised fund donation,ā Bigge said.
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